Element 8 8.1.6_internal_and_external_sour Quiz

Which of the following is an internal source of finance?

• Bank overdraft

• Retained profits

• Trade credit

• Venture capital

Answer explanation

Retained profits are an internal source of finance as they are generated from the company's own earnings, unlike bank overdrafts, trade credit, and venture capital, which are external sources.

What is a disadvantage of using retained profits as a source of finance?

• Interest payments

• Dilution of ownership

• Limited availability

• Increased debt

Answer explanation

A disadvantage of using retained profits is their limited availability, as they depend on the company's past earnings. Unlike external financing, retained profits may not be sufficient for large investments or unexpected expenses.

Which external source of finance involves borrowing money that must be repaid with interest?

• Sale of assets

• Net current assets

• Loans

• Retained profits

Answer explanation

Loans are a form of external finance where money is borrowed and must be repaid with interest, making them distinct from other options like sale of assets or retained profits.

Which source of finance is commonly used for purchasing expensive equipment without owning it?

• Leasing

• Trade credit

• Bank overdraft

• Crowdfunding

Answer explanation

Leasing is a common source of finance for acquiring expensive equipment without ownership. It allows businesses to use the equipment while making regular payments, making it a practical choice for managing cash flow.

What is an advantage of using a bank overdraft?

• No interest charges

• Long-term finance

• Flexible borrowing

• No risk

Answer explanation

An advantage of using a bank overdraft is flexible borrowing, allowing you to access funds as needed without a fixed repayment schedule, making it suitable for short-term financial needs.

Which of the following is an example of owner's capital?

• Trade credit

• Personal savings

• Bank loan

• Leasing

Answer explanation

Owner's capital refers to funds contributed by the owner, and personal savings are a direct example of this. Trade credit, bank loans, and leasing involve external financing, not the owner's own funds.

What is the main disadvantage of debt factoring?

• High interest rates

• Loss of control

• Reduced profit margins

• Long-term commitment

Answer explanation

The main disadvantage of debt factoring is reduced profit margins, as businesses must sell their receivables at a discount to the factoring company, which can significantly lower their overall profits.

Which source of finance involves selling shares to the public?

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Answer explanation

The source of finance that involves selling shares to the public is known as equity financing. This allows companies to raise capital by offering ownership stakes to investors.

What is a benefit of using grants as a source of finance?

• Repayment required

• No interest charges

• Dilution of ownership

• Increased debt

Answer explanation

A key benefit of using grants as a source of finance is that they do not require repayment or incur interest charges, making them a cost-effective option compared to loans or other financing methods.

Which of the following is an internal source of finance?

• Hire purchase

• Sale of assets

• Crowdfunding

• Venture capital

Answer explanation

The correct answer is 'Sale of assets' as it involves using existing resources to generate funds, making it an internal source of finance. The other options, like hire purchase and venture capital, involve external financing.